The dark side of strengthened minority voting power: An innovation perspective

Abstract

AbstractBased on the 2014 regulatory reforms aimed at strengthening the protection of legitimate rights and interests of minority investors in China, we investigate minority shareholders’ short‐termism and how minority voting impacts firm innovation. We find that the 2014 reforms effectively motivate minority shareholders to attend shareholder meetings and greatly enhance their voting influence. We also find that enhanced minority voting power after the reforms lowers the number of firms’ patent applications, and this effect is more pronounced for the firms that see the greatest increase in shareholder attendance at shareholder meetings. Moreover, enhanced minority voting power boosts executive turnover‐performance sensitivity, thereby undermining firm innovation. Finally, we show that different types of minority shareholders have distinct impacts on firm innovation, depending on their investment horizons. The negative effect of minority voting power is more pronounced for state‐owned enterprises (SOEs) than for non‐SOEs.